This Week
Last week, we took a look at the results from:
In our "Shor news" section, you'll find a summary of Sofina's latest results. We already covered the most significant news from Sofina in the newsletter, which we discussed right here.
Oracle, too expensive?
As an investor, you have to follow the news. That means primarily corporate news, of course, but you can’t be blind to macroeconomic news either. Unfortunately, that also means you have to deal with general news, and these past few days and weeks have been truly awful.
I’ll stick to corporate news for now. It’s pretty clear by now that I’ve become more cautious and am more on the selling side than the buying side. Not because there are no more cheap companies to be found—we still have some in our portfolio, actually—but because the excesses are getting bigger and crazier.
Take Oracle, for example. The stock jumped 40% yesterday. The reason? A gigantic order from OpenAI. Oracle’s order book surged by 359% to $455 billion, but a whopping $300 billion of that is from OpenAI, spread over five years, with $30 billion due in 2027.
Oracle expects its cloud division's revenue to grow from $18 billion this fiscal year to $144 billion in five years. Let’s crunch these numbers and see if investors aren't paying a far too high premium for these future expectations.
I won’t even get into the debate about whether OpenAI can actually afford this. They're currently burning through billions in cash every year. This is being funded by capital increases, but at some point, those investors are going to want a return on their money.
Currently, Oracle has a revenue of $59 billion, of which $10 billion comes from cloud infrastructure, $3 billion from hardware, $5.2 billion from services, and $39 billion from licenses. For now, licenses and cloud are still reported as a single segment, showing an impressive 63% operating margin.
Although I assume licenses generate a higher margin than cloud infrastructure (which involves hardware, energy costs, and the like), I’ll calculate as if the margin remains the same. We know that Google's cloud services are only just becoming profitable due to large investments, while Microsoft's margin is around 40-45% and Amazon's is between 50-60%. In short, by using 62%, we're being very generous and also assuming synergy benefits with the other business units.
If we assume the cloud division achieves its growth over the next five years and the other departments remain stable, even though hardware and services have shown a declining trend, then within five years, revenue will be around $182 billion. This is a CAGR (compound annual growth rate) of 25.3% over the next five years. For the rest of the period, I'll assume they revert to their ten-year growth rate of 4.5% and apply this to the terminal value, which again, I think is a generous calculation.
To summarize:
We believe in a growth rate of 25.3% for the next five years and 4.5% into infinity after that, despite the largest customer being heavily loss-making.
We're not taking into account the gigantic investments needed for this growth when it comes to the margin.
Our discount rate is 10%, whereas I would normally take 12% to 15% due to the uncertain factors.
So we're calculating generously.
If we run a DCF calculation on this, we arrive at a value of $115 per share based on cash flow and $193 per share based on profit. The current share price is $328.
If we calculate the other way around, starting from the share price with the same discount rate, it means Oracle's revenue has to keep growing at that rate for ten years, not five.
As an investor, you're essentially gambling that OpenAI will become profitable or find enough crazy people to raise another $300+ billion, and that Oracle will also find other customers to sustain that growth. And all for a measly 10%? No, thank you.
My Take on Nyxoah
Last week, a subscriber asked for my opinion on Nyxoah. Since the reader said my perspective was helpful, I'm happy to share it with you all. This is what I wrote:
I know Nyxoah by name, but I don't know it well enough to say much about it. It’s a type of company that falls outside my scope.
Over the last twelve months, they had a revenue of €4.9 million and a gross profit of €3.2 million. Their overhead costs were €39.2 million, and they spent another €38.7 million on research and development.
Let’s say they can maintain the same gross margin of 65%. Their revenue would need to be at least €120 million to break even (assuming their overhead stays the same and doesn't increase).
Realistically, their revenue doesn't need to double, which analysts assumed, but rather has to grow forty times its current size before they're profitable. That’s too difficult for me to assess if it’s realistic within a short enough time frame.
These are often companies that never reach maturity because they are acquired by a larger company before they get there. Your investment thesis here should therefore be focused on who would want to buy this company and how much they are willing to pay (often in multiples of revenue, not profit, for this type of company). The company's growth then only serves to support that thesis; the profit doesn't matter.